Sweden to cut income taxes as govt eyes 2014 election

STOCKHOLM

STOCKHOLM (Reuters) - Sweden's centre-right coalition government said on Monday it would cut income taxes for a fifth time since 2006, aiming to boost a sluggish economy and overcome a daunting lead for the opposition heading into elections next year.

The package of tax cuts will total 15 billion Swedish crowns $2.28 billion (1.43 billion pounds), comprising 12 billion in lower income taxes and 3 billion related to a raising of the threshold for incomes subject to central government as well as municipal taxation.

"If we do not use our strong public finances we risk losing jobs," Prime Minister Fredrik Reinfeldt told a news conference.

"What we propose now will generate 13,000 new jobs. Most experts are in agreement that this measure creates jobs."

The ruling centre-right government is behind in the polls and the economy remains sluggish, two reasons for the fiscal largesse as the central bank is not seen likely to ease policy due to concerns about high levels of household debt.

In addition, some of the strongest public finances in Europe - government debt is at well below 40 percent of gross domestic product - provide the government with the ample fire power, though strict budget rules imply a less clear picture.

The four-party Alliance has said it plans around 25 billion in tax cuts and spending measures in the upcoming budget to boost growth, of which the trimming of income taxes is the centre-piece of the package.

It has already announced 2.5 billion crowns worth of tax cuts for pensioners, similar-sized measures to cut unemployment insurance costs and get more young people in to the job market and a boost to teachers' wages.

Swedish public finances are robust, but the budget measures will lead to deficits in the coming years.

The state budget watchdog said recently the government - which has built up a reputation for fiscal probity - would have to tighten policy if it is to achieve its target of a 1 percent surplus in public finances over a business cycle.

Sweden's government has already cut income taxes four times since it took power while at the same time cutting welfare benefits, leaving the country sliding down in the ranking of European countries' tax revenues as a share of GDP.

The Nordic economy contracted unexpectedly in the second quarter, though the government has forecast growth of 1.2 percent this year. ($1 = 6.5678 Swedish crowns)